Daily Archives: July 19, 2023

A Brief Introduction to the Components of Logistics Management (LMI Part 2)

In our last article we noted that Logistics Management is something that many procurement professionals overlook because most larger organizations have a separate logistics department, but it’s something that they shouldn’t because they won’t understand the true cost, the true delivery times, or the true risk of their sourcing decisions, which may, because of this, turn out to be more costly, more risky, and considerably less efficient than they expect.

In addition to being costly and risky, Logistics Management is not an easy ordeal. In order to manage logistics effectively, you need to:

  1. determine what you need and when you need it
  2. determine how to package it and how much room the packaging takes, and this requires the organization to calculate
    1. how many packages you can get on a pallet
    2. how many pallets you can get in a truck / container / rail car
    3. how many trucks / containers / rail cars you need
  3. determine the viable lanes for shipping from the suppliers to your warehouses and get quotes
  4. select the providers and plan the transport
  5. accurately cost the orders, shipments, and tariffs to make sure you have enough cash on hand to meet your obligations when your invoices come due

This typically requires five different systems, and/or modules. Namely a(n):

OM/FS: Order Management/Forecasting System
This integrates with your MRP system, looks at the production plan, looks at the inventory level, and determines the order quantities needed by week for the next X weeks based on how far out the production plan goes (which, in most systems, typically isn’t that far out, maybe a few months) and then uses the forecasting capabilities to project out a few months ahead of the average transportation time. It will also allow a user to override plans and projections, override default suppliers and carriers if there are options, and calculate any ramifications. And any related functions the organization needs around order management and forecasting. (We’re not going to go deep on any particular capability in this article.)

PMS: Package Management System
Logistics management is not as simple as calculating an order and contracting a carrier. You have to know how much space you will need for the shipment, which will dictate how many trucks, rail cars, or containers. That will depend on how many packaged units you can fit in the space, and that’s often more than a simple volume calculation, as you have to fit parts to boxes, boxes to pallets, and pallets to containers/cars. This requires more sophisticated volume and weight calculations than one would expect, which are not easy to do in a spreadsheet. Plus, if you have multiple options, you have to figure out which is best to minimize your shipping requirements.

FQMS: Freight Quote Management System
Once you know what you need, where it’s coming from, where it’s going to, how it’s going to be packaged, what kind of transport you need, and how many units (trucks, rail cars, containers, etc.), you need to find, and contract, a carrier. But the first step is to get inclusive quotes (costs per mile, fuel surcharges, handling charges, etc.) from carriers, compare and analyze them, contract one or more carriers, and then mark their quotes as contract rates, and others as quotes, but not guarantees.

TMS: Transportation Management System
Once you’ve determined your shipping needs, selected a carrier, and contracted a quote, you need to manage the transportation. You need to provide all the appropriate information to the carrier, get the pickup dates and expected delivery dates, receive and track updates, manage any issues that arise or reroutings that need to be done, identify any delays that will cause production or customer delivery risks and determine resolutions, and so on.

FPS: Financial Planning System (Cash Flow Planning)
Finally, you need to track all of the current and projected costs, and changes, so that you can manage your cash-flow and have the necessary cash when the invoices come in.

In other words, Logistics Planning and Management is currently quite an involved process that requires quite a few modules and process steps to do (reasonably) well.